Price Skimming - Explained
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All right. So as marketers we're
responsible for making an
awful lot of decisions that have major
impact on the company's success
and uh revenues and profits and all
those measures of success.
But few have as direct an impact as our
price decision in other words the
strategy that we take
for setting the price of our product.
One way that we could approach this is
to use what's called price skimming.
Price skimming is setting a product's
initial price high
and then gradually lowering it over time
total profit. Now this may sound strange
but it's a common strategy with new
products especially techno
technology related products. Let me
sketch this out for you.
Okay. Let me draw this out but bear with
me because i'm no great artist
and i'm also unfortunately have
pretty poor handwriting but the key here
is that as time goes by we're going to
change our price.
As I just said where we're going to
is pretty high, so what we hope to see
is that some people will buy at this
Think about a new
uh video game system, some people will
buy it as soon as it comes out
at whatever price this is over here was
just say price
Some people will buy that some people
will say that's too high and they won't
but those that will pay that high price
the company captures a large profit
margin on those that are sold.
Then what happens is
we drop the price, and time is going on
or going by but also
more people are buying. So at price two
there's a different set of people
willing to pay that price and
therefore willing to buy our product.
Then maybe a little more time passes
and we drop down to our final price we
get that last
group of people to buy and now what we
is that each group of people has paid
the highest price that they were willing
in other words we have maximized our
profit over the course of time,
that's the goal with a price skimming